Going to share some notes on my accounting class here.
Module 1: A Framework for Financial Accounting
Part A: Accounting as a measurement/communication process
Accounting - “A system of maintaining records of a company’s operations and communicating that information to decision makers.”
Financial accounting is something that provides information that is useful to investors and creditors in making decisions (useful to third parties), that helps to predict cash flows, and that talks about economic resources (claims to resources/changes in resources and claims).
The two primary functions of financial accounting is to measure business activity and report those measurements/the business activity to third parties such as investors and creditors for decision making purposes.
There are three main types of activities:
- Financing Activities - Getting money through loans/credit
- Investing Activities - Purchasing stuff to better the company, such as buying printers, new machines, etc.
- Operating Activities - Costs to do the business such as employee salary
Seems like investing activities are one time costs of certain things while operating activities are on-going costs.
The accounting formula is Assets = Liabilities + Stockholders Equity.
Assets are the resources of a company.
Liabilities are the money owed to others. Loans are a typical liability but so are unpaid wages.
Stockholders Equity is the owners claim to the resources of the company.
The above formula is thus saying that the resources of a company are other owned by the owners or by creditors.
The profits of a company either go back into the company or get paid to owners as dividends. Dividends are not considered an expense of the company.
The benefit of being a corporation is its limited liability meaning that the business owners personal wealth is not up for grabs in disputes with the company. The downside is possible double taxation, because the corporation is taxed and then personal income is taxed, but this varies a lot.
Communicating through Financial Statements
There are five main(?)/important financial statements in accounting. They are:
- Income Statement
- Statement of Stockholders Equity
- Balance Sheet
- Statement of Cash Flows
- Statement of Comprehensive Income
Income Statement - Shares the net income of a company over a period of time (weeks, months, quarters, years)
Statement of Stockholders Equity - Shares the changes in stockholder equity over a period of time.
Balance Sheet - Presents the financial position of a company at a certain period of time (such as today, yesterday, July 1st, end of December, etc.). The financial position consists of
- Liabilities
- Stockholder Equity
- Revenues
- Expenses
- Assets
Statement of Cash Flows - Used to share information about the money coming in and out of the company over a period of time. There are three different cash flow categories:
- Operating
- Investing
- Financing
Statement of Comprehensive Income - Changes in stockholder equity from non-owner activity (I guess regular business stuff is owner activity?). Things such as gains in investments.
Ok that’s it for now. I’ll share more soon, but I’m surprised that accounting is defined by its usefulness to third parties and less by its usefulness to the business entity itself.